Vodafone bid for Mannesmann seen probable

CBS.MarketWatch.com

LONDON (CBS.MW) --It's the story that just won't die.

Ever since Germany's Mannesmann AG cut a deal last month to buy the U.K. mobile phone operator Orange PLC, speculation has swirled around the European markets that Vodafone AirTouch PLC will enter the fray with a hostile bid for Mannesmann.

The talk reached a fever pitch Friday when the Wall Street Journal Europe reported that Vodafone AirTouch, the world's biggest cellular phone operator, is planning to mount a hostile bid for both Mannesmann and Orange, valued at more than $100 billion. According to the Journal, this could come as soon as next week.

"Clearly Vodafone is making preparations with the intention of making a bid. Vodafone is very keen to get Mannesmann and this might be the only opportunity," said Anthea Gaukroger, London-based telecom analyst at Greig Middleton.

After previously refusing comment, Vodafone AirTouch released a statement Friday. The U.K.-based group said it's looking at ways to develop its "existing long standing relationship" with Mannesmann. Vodafone AirTouch said it was continuing to evaluate a wide range of opportunities to participate in further consolidation of the global cellular phone market. "No decisions have yet been taken with regard to any specific options," the company said.

Helmut Plettenberg, a Mannesmann spokesman at the company's headquarters in Dusseldorf, said Mannesmann doesn't comment on speculation.

Mannesmann turns up the heat

Analysts say Vodafone AirTouch
VOD, +0.68%
needs Mannesmann to bolster its European presence. The two are currently partners in Germany, Italy, and France, three of Europe's four biggest telecom markets. But in the fourth, the U.K., Mannesmann has moved in as a competitor by agreeing to a $33 billion deal for Orange
orngy
the U.K.'s No. 3 mobile phone operator, which would give it a strong presence in Vodafone AirTouch's backyard. See full story.

Mannesmann already has control over Vodafone AirTouch's two biggest European assets, Mobilfunk D2 in Germany and Omnitel in Italy. Mannesmann owns 65 percent of the German group compared to Vodafone's 35 percent and 55 percent of Omnitel versus Vodafone's 22 percent. The two are also partners in France's SFR/Cegetel.

Observers say Mannesmann's move on Orange caught Vodafone AirTouch with its pants down. "Vodafone would've been happy with the situation as it was. They understood they had a partnership. They believed they could rely on Mannesmann. Now it's clear they can't," said John Tysoe, London-based telecom analyst at West LB Panmure.

A move from the British-based group could also serve another purpose: as a defensive play, given the consolidation currently sweeping the telecom sector worldwide. "Vodafone itself realizes it's not out of the reach of a MCI WorldCom
wcom
or a NTT DoCoMo
nmcny
" Tysoe said.

Vodafone AirTouch faces obstacles

Still, hostile takeover bids have a poor record of success in Germany, which has some observers asking why this one -- if indeed it happens -- would succeed.

There are a few differences that might tip the scales in Vodafone's favor. For a start, 60 percent of Mannesmann's shareholders are outside of Germany, in places like the U.S., where the culture of shareholder rights dominates, and demands for shareholder value are commonplace.

Petra Heist, telecom analyst at Vereinsbank Research in Munich, said if shareholder value is created through a Vodafone takeover, Mannesmann's German shareholders would sell. "Everything depends on the premium. There has to be a reasonable premium or Vodafone won't get people to sell," she said.

Defense possible

In any case, Vodafone AirTouch will have to sway a huge number of Mannesmann's shareholders. Under German law, there are strict voting restrictions. If a shareholder has more than a five percent stake in a company, he or she loses their voting rights. For anything under five percent, it's one share, one vote. German companies also know the identity of all their shareholders through registration books, and if they have a strong reason, they have the power to block shareholders from voting.

One possible defense for Mannesmann would be for it to make another acquisition -- one big enough to make a Vodafone move on the German telecom and engineering giant less tenable. That's why analysts say Vodafone AirTouch must strike while the iron is hot.

Mannesmann's market capitalization is currently just under $72.8 billion (70 billion euros), putting it in fourth place on the Xetra DAX index with an 8 percent weighting. Vodafone AirTouch's market capitalization is a shade under $162.25 billion (100 billion pounds), giving it a weighting of about 7.7 percent on the FTSE 100 index, the number two position behind BP Amoco PLC
BP.A, +0.00%

What would the regulators say?

There's also the question of what the regulators would have to say about a Vodafone AirTouch-Mannesmann tie-up. In the U.K. Vodafone AirTouch would likely have to sell Orange. According to press reports, France Telecom SA
FTE, -2.32%
is considered a potential buyer for the U.K. wireless operator. But surprise, surprise, the French group won't comment on market or press speculation.

Aside from the U.K. and Belgium, where Vodafone AirTouch may have to dispose of Orange's network, analysts say regulators may actually welcome a deal. "Vodafone won't launch a bid unless they're sure they can succeed," West LB Panmure's Tysoe said.

Vodafone AirTouch, a company that's under 16 years old, would then have significant scale to take on each of the former monopolies such as Deutsche Telekom AG
dt
and Telecom Italia SpA
TI, -0.37%
in their home markets. "Vodafone's a profound leader for cultural change," Tysoe said.

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